No-one likes Debt. It's debilitating, can be difficult to shake and, in extreme cases, it can lead to bankruptcy. But there is a way you can rid yourself of your toxic debt and be financial independent again. And best of all it's easy!
It is called a debt snowball and it will make paying off your debt easier than ever before.
The debt snowball
So what is a debt snowball?
It's simply a way of paying off your debts - one by one - starting with the smallest debt you have and building to the largest.
Just like a snowball gathers more and more snow as it rolls down the hill, you will gather more and more momentum in paying off your debts the further you progress.
What you need
The first thing you need is a conviction to get rid of your debt. Once you have that, then all you need is to cut down your spending and start using that money to pay down your debt.
You need to curb your spending. Having a budget is a great way to do this. The more you know about your financial situation and where your money goes, the better off you will be and the more money you will have to pay off your debt.
Cut back on expenses
Find ways to cut back on out-goings like bills. You can either cut back on services, like internet or cable; consolidate your services to make them cheaper, like combining your internet and phone services; or cut them out all together, like cancelling your cable service.
Other ways you can save money is by simply having a shopping list when you go shopping and try to stick to basic foods and start cooking more rather than eating processed or fast foods, or eating out.
Cut up your credit cards
Most people's toxic debt has a lot to do with credit cards.
You need to stop using them and cut them up! It's the only way you can guarantee you will stop using them. If you are saying to yourself right now that you can't possibly do that because you rely on them too much, then you need to have another look at your budget to figure out how you can live without them.
There is no point going through this exercise if you are still racking up more debt.
Starting the snowball
The hardest part is starting, but you will find the more you pay off the more liberated you will feel and the more you will want to pay. Just follow these simple steps:
- Make a list of ALL your debt. Credit cards, personal loans, HECS, student loans - everything you can think of. And write down how much you owe next to each one. Leave out any mortgage debt as this is not toxic (in most cases) and you can deal with that in other ways
- Then organise the list from the lowest amount to the highest. The first debt on that list will be your first target, and the beginning of that snowball
- Meet all the minimum payments for every debt on the list, except the first
- Pay off as much as you can on that first debt. Throw every cent of spare money at it. And keep doing this until it is paid off
- Once you have paid off this first debt, move on to the next one on the list. And so on. Making sure you meet the minimum payments of the others at the same time - you don't want to default on a debt.
The idea behind this method is that you will be able to pay off your debt in smaller, manageable chunks and get a feeling of achievement after paying off the smaller amounts that will spur you on to pay off all of your debt.
This really works
And trust me on this - it works. This is the way I paid off all of my debt.
And I believe that it ended up taking a shorter time because I became so focused on the mission of eliminating my debt that I paid it off quicker than I thought possible. And you can too.
Some people will tell you to pay off the debt with the highest interest rate first as it will save you money in repayments, and it probably would, but I have three rebuttals to this:
- People are human, and have all the psychological foibles that go along with that, so common sense doesn't always work in practice
- Once you start paying off each debt you may just get obsessed by it like I did and get inspired to pay off more, thus paying it all off quicker than you would of normally (thus saving money)
- This method works!
That's the snowball method of paying off debt. Simple and effective.
But it will only work if you have the spare money to pay off more than the minimum amount of whatever debt you are focusing on.
To do this you need to cut your spending and channel that extra money into the debt. This may mean going without for a little while, but that is a small price to pay in the short-term for long-term happiness and financial freedom.
Have you tried to pay off your debt before? What method did you use?